By TIOL News Service

MUMBAI, APR 12, 2016: THE appellants are a freight forwarding agency and they are also registered as a multi-modal transport operator. They book cargo space in shipping lines and thereafter, they provide/allot the space to their customers. The department was of the view that the activity undertaken by the appellant comes within the category of "Business Auxiliary Services" and the appellant was promoting the service rendered by the shipping lines.

Accordingly, service tax demand of Rs.2.75Crores for the period 2005-06 to March 2011 was confirmed along with penalties and interest by the Commissioner of Service Tax, Mumbai .

In the matter of the Stay application filed by the appellant, the Division Bench observed -

"6.1 Cargo space is not goods; therefore, booking of cargo space and trading in cargo space cannot be considered as supply/sale of goods and has to be considered as supply of services. Any activity other than supply of goods amount to supply of service. Therefore, we do not find any merit in the argument of the Ld. Counsel that they have indulged in trading activity and not in service activity. Secondly, we also do not find much force in the argument of the appellant that service has to rendered always as an agent. The law does not warrant that the service provider has to be an agent. As in the case of goods, service also can be supplied/rendered on a principal to principal basis…."

Concluding that the appellant had not made out a prima facie case in their favour, the appellant was directed to make a pre-deposit of Rs.89 lakhs (demand for normal period). We reported this order as - 2013-TIOL-1206-CESTAT-MUM.

The appellant took the matter in further appeal and the Bombay High Court held -

"7. Having heard the learned counsel for the parties and considering that the Tribunal has followed the decision of the Chennai Bench in Leaap International Pvt. Ltd. vs. CST, Chennai (supra) whereby the Tribunal had directed the assessee to make pre-deposit of Rs.30 lakhs against the tax demand of Rs.1.38crore which was within the period of limitation and even so the Madras High Court reduced the amount of pre-deposit to Rs.20 lakhs. Moreover, the appellant has an arguable case in the appeal pending before the Tribunal, the interest of justice would be served if the amount of pre-deposit is reduced from Rs.89 lakhs to Rs.45 lakhs. At this, Mr. Wagley, learned counsel for the appellant, seeks further time of three months to make deposit as the appellant has liquidity problems."

The appeal was partly allowed inasmuch as the appellant was directed to make a pre-deposit of Rs.45 lakhs and report compliance. Kindly see 2013-TIOL-669-HC-MUM-ST.

The appeal was heard in September 2015 and an order has been issued recently.

The Division Bench inter alia observed -

+ Each source of income must be looked at independently. A service provider is not necessarily a specialist in rendering one service; the earnings of a service entity may accrue from one or more services - some of which may be taxable. Finance Act, 1994 does not envisage determination of taxability from accounting entries. The manner or mode of booking the profit in the accounts of a commercial organization has no bearing on the application of section 65(105) to a taxable activity. The nomenclature in the accounts that appears to have weighed heavily with the original authority is not material to classification of the service when the taxable entry specifies the legislative intent.

+ The description of the taxable service in section 65 (105) of Finance Act, 1994 as well as definition, if any, of the terms therein are the primary determinant for taxation of any service. From the observation of the High Court of Gujarat [re: Sports Club of Gujarat], it is clear that the provision of service is manifest by the existence of service provider performing an activity for which consideration is received from the recipient of the service. A finding on these aspects is distinctly absent in the impugned order.

+ The original authority has proceeded on the assumption that there is only one payment and, that too, for freight charged by the shipping line. He has rejected the possibility of trading in space or slots on vessels by holding that trading in space or slots is a figment and freight is all that is transacted.

+ Slots may be contracted for by the shipper or its agent with the shipping line through the steamer agent. Implicit is a unidirectional flow of consideration because the space belongs to the shipping line. Steamer agent or agent of shipper may earn commission in such a transaction. Leaving that situation aside, the contention of the appellant is that it is a ‘multi-modal transport operator' which entails a statutorily assigned role in cross-order logistics.

+ The appellant often, even in the absence of shippers, contract for space or slots in vessels in anticipation of demand and as a distinct business activity. Such a contract forecloses the allotment of such space by the shipping line or steamer agent with the risk of non-usage of the procured space devolving on the appellant. By no stretch is this assumption of risk within the scope of agency function. Ergo, it is nothing but a principal-to-principal transaction and the freight charges are consideration for space procured from shipping line. Correspondingly, allotment of procured space to shippers at negotiated rates within the total consideration in a multi-modal transportation contract with a consignor is another distinct principal-to-principal transaction. We, therefore, find that freight is paid to the shipping line and freight is collected from client-shippers in two independent transactions.

+ The notional surplus earned thereby arises from purchase and sale of space and not by acting for a client who has space or slot on a vessel. Section 65(19) of Finance Act, 1994 will not address these independent principal-to-principal transactions of the appellant and, with the space so purchased being allocable only by the appellant, the shipping line fails in description as client whose services are promoted or marketed.

Holding that there is no justification for sustaining the demands, the same were set aside.

(See 2016-TIOL-869-CESTAT-MUM)